Leaders 13T
he pandemiccauseda fearsomeeconomicslump,butnowa
weird, exhilarating boom is in full swing. The oil price has
soared, while restaurants and haulage firms are having to fight
and flatter to recruit staff. As listed firms signal that profits will
hit an alltime high this year, stockmarkets are on a tear. An in
dex produced by JPMorgan Chase and ihs Markit suggests that
global growth is at its highest since the exuberant days of 2006.
Any escape from covid19 is a cause for celebration. But to
day’s booming economy is also a source of anxiety, because
three fault lines lie beneath the surface. Together, they will de
termine who prospers, and whether the most unusual recovery
in living memory can be sustained.
The first fault line divides the jabs from the jabnots. Only
those countries getting vaccinations into arms will be able to
tame covid19. That is the condition for shops, bars and offices to
reopen permanently, and customers and workers to have the
confidence to leave their homes. But only one in four people
around the world has had a first dose of vaccine and only one in
eight is fully protected. Even in America some undervaccinated
states are vulnerable to the infectious Delta variant of the virus.
The second fault line runs between supply and demand.
Shortages of microchips have disrupted the manufacture of
electronics and cars just when consumers want to binge on
them. The cost of shipping goods from China to
ports on America’s west coast has quadrupled
from its prepandemic level. Even as these
bottlenecks are unblocked, newly open econo
mies will create fresh imbalances (see Briefing).
In some countries people seem keener to go for
a drink than they do to work behind the bar,
causing a structural labour shortage in the ser
vice sector. House prices have surged, suggest
ing that rents will soon start to rise, too. That could sustain infla
tion and deepen the sense that housing is unaffordable.
The final fault line is over the withdrawal of stimulus. At
some point, the state interventions that began last year must be
reversed. Richworld central banks have bought assets worth ov
er $10trn since the pandemic began and are nervously consider
ing how to extricate themselves without causing a flap in capital
markets by tightening too fast (see Finance section). China,
whose economy did not shrink in 2020, offers a sign of what is to
come: it has tightened credit policy this year, slowing its growth.
Meanwhile, emergency governmentaid schemes, such as
unemploymentinsurance topups and eviction moratoriums,
are beginning to expire. Households are unlikely to get a fresh
infusion of “stimmies” in 2022. Deficits will contract rather than
expand, dragging down growth. So far, economies have largely
avoided a wave of damaging bankruptcies but nobody knows
how well firms will cope once emergency loans come due and
workers can no longer be furloughed at taxpayers’ expense.
You might think that an event as extreme as a pandemic,
combined with the unprecedented government response to it,
would eventually trigger an equally extreme global economic re
action. Pessimists worry about a return to 1970sstyle inflation,
or a financial crash, or that capitalism’s underlying energy will
bedrainedbystatehandouts.Suchapocalyptic outcomes are
possible, but they are not likely. Instead a better way to think
about the unusual outlook is to examine how the three fault
lines interact differently in different economies.
Start with America. With abundant vaccines and enormous
stimulus, it is at the biggest risk of overheating. In recent
months inflation has reached levels not seen since the early
1980s. Its labour market is coming under strain as economic ac
tivity shifts. Even after a rise of 850,000 in the number of jobs in
June and accounting for abundant vacancies, the number of
people working in leisure and hospitality is 12% lower than be
fore the pandemic. Workers are reluctant to return to the indus
try, which has pushed up wages. Hourly pay is almost 8% higher
than in February 2020. Perhaps they will come back when emer
gency unemployment benefits expire in September. But coun
tries without such a scheme, like Australia, are also seeing a la
bour shortage. Attitudes to work may be changing at the bottom
of the income spectrum, among waiters and cleaners, not just
among wellheeled professionals who dream of yachts and sab
baticals. All this suggests that America’s economy will run hot,
with continual pressure on the Federal Reserve to tighten policy.
Elsewhere in the rich world the picture is less exuberant. It
includes some jabnots, like Japan, which has fully vaccinated
less than 15% of its population. Europe is catch
ing up on vaccines, but its smaller stimulus
means that inflation has not reached American
levels. In Britain, France and Switzerland 813%
of employees remained on furlough schemes at
the end of May. In all these economies the risk
is that policymakers overreact to temporary,
imported inflation, withdrawing support too
quickly. If so, their economies will suffer, just
as the euro area suffered after the financial crisis of 200709.
Low and middleincome countries are in a bind. They
should be benefiting from surging global demand for commod
ities and factory goods, but they are struggling. Indonesia, bat
tling another covid19 wave, is redeploying oxygen from indus
try to hospitals. In 2021 the poorest countries, which are desper
ately short of vaccines, are forecast to grow more slowly than
rich countries for only the third time in 25 years.
Even as covid19 weakens their recoveries, emerging markets
face the prospect of higher interest rates at the Fed. That tends to
put downward pressure on their currencies as investors buy dol
lars, raising the risk of financial instability. Their central banks
do not have the luxury of ignoring temporary or imported infla
tion. Brazil, Mexico and Russia have raised interest rates recent
ly, and more places may follow. The combination of jabbing too
late and tightening too soon will be painful.Prepare to take shelter
The economic cycle has been frantic, leaving the slump far be
hind in only a year. Perhaps by the summer of 2022 most people
will be vaccinated, business will have adapted to new patterns of
demand and stimulus will be unwinding in an orderlyway. In
this weird boom, however, beware those fault lines.nThe global economic recovery is fast, furious—and fragileFault lines in the world economy